For the second quarter of 2011 it looks like Main Street and Wall Street will present two very different pictures. While large publicly traded companies are expected to report strong profits, small businesses across the country are still dealing with tight credit, nervous customers and increased costs.

“We still see many small and midsized business owners not obtaining sufficient loans and being very disgruntled with the banks”, says Achim Neumann, President of A Neumann & Associates in New Jersey. ”This is a significant challenge given that small businesses account for more than half of private-sector employment and gross domestic product”

Economic uncertainty and inflationary pressures have resulted in delayed hiring and capital expenditures. Often there are no plans to expand staff  within the foreseeable future, according to a recent U.S. Bancorp survey of  over 1,000 companies in the U.S.. All have with annual revenue of $10 million or less.

Despite 50% of the companies expecting more revenue in a year, 78% believe the U.S. economy remains  in a recession, and many expect it to stay there into 2012.  In May, the optimism index of the National Federation of Independent Business declined. This is now the third month in a row that this has been the case.

One outcome of this environment continues to be a smaller number of businesses being available for sale. “Whereas in the past we have had consistently 1,000 businesses for sale and 1,000 buyers interested in an acquisition in our network, the numbers have changed to 300 businesses for sale, with 1,000 buyers remaining,” says Neumann.  Consequently, any seller contemplating a sale of his business is in an excellent position to obtain the full Fair Market Value for his operations.

And with activities having started to pick up in the second quarter on the sell side, now might be the best time for a business owner to get started. “There has not been any time in the past ten years where buyer inquiries have so significantly outnumbered businesses available for sale,” says Neumann,  “and with a team of thousand professionals in the field we are very well positioned to support business owners in obtaining their goals.”

Achim Neumann is president of
A.Neumann & Associates, LLC
Atlantic Highlands,
an affiliate of BBN, Dallas, Texas, with 450 offices nationwide.

Visit the firm at www.neumannassociates.com
or call 732-872-6777

Quite often, we are asked during presentations which ‘multiple’ is the right one with which to assess the value of a business. Without doubt, most business owners then volunteer that the EBITDA multiple (Earnings Before Interest, Tax, Depreciation, Amortization) is the best single criteria.  However, only relying on earnings can be short sighted.

EBITDA, by its definition removes the elements of financing and accounting decisions by adding back interest, depreciation and amortization and thus, can be used to compare the profitability between companies and industries. Further, it can analyze industry trends over time.

However, EBITDA is not always a good measurement for cash flow– with cash flow being the most vital component for small and midsized businesses to survive. For that matter Operating Cash Flow is a much better criterion to assess cash flow since it includes the changes in working capital– most significantly A/R, inventory and A/P.

For example, relying only on EBITDA as value measurement, an analysis could easily neglect to find an inventory built-up due to poor product design, resulting in an increased need for financing or future margin erosion due to required discounting. Additionally, the need for additional working capital as accounts receivable increase; can cause a significant drain on cash, particularly in seasonal businesses.

Generally, there is no single “rule of thumb” by which to assess the value of a business. Indeed, we caution not to use very often heard ratios such as 50% of annual sales for liquor stores, 1.1 times revenue for accounting firms, 60% of revenue for dental practices or 3 times for software companies, just to mention a few examples.

As a matter of fact, most professional valuation associations do not recognize rules of thumb as legitimate valuation methodologies. Large databases of market comparables, such as Pratt’s Stats, BIZCOMPS or the one of our firm provide a basis for a much more qualified approach.

Typically, a professional valuation is based on numerous criteria, such as an Asset Based Approach, Income Based Approach and Market Based Approach, whereas each approach has several sub-criteria to establish a value. The valuation firms we work with usually take at least eight different key components into account for a value assessment. Then weighting each of the methodologies based on their respective merit to arrive at a Fair Market Value for the business.

Only such a detailed approach will provide the seller not only with a Fair Market Value for his own decision making, but said approach also establishes credibility for the asking price with a potential buyer and with lending institutions funding the acquisition for the buyer. Omitting such a professional valuation will ultimately hurt a seller in more than one way.

Achim Neumann is president of
A.Neumann & Associates, LLC
Atlantic Highlands,
an affiliate of BBN, Dallas, Texas, with 450 offices nationwide.

Visit the firm at www.neumannassociates.com
or call 732-872-6777

by Achim Neumann

What are some of the financial aspects of running a business while selling it? Most owners know more about running a business than selling it, which can be a daunting task by any measure. A business transfer is complicated endeavor, and if not executed properly, runs the risk of losing substantial value in the process. Several major concerns are consistent in each transfer— fair market value assessment of the business and consistent financial performance throughout the transfer process.

A fair market value must first be determined. This is typically the basis of the past three year’s tax returns. Too low an asking price will leave “money on the table”. An overstated asking price, however, will chase buyers away and the business remains unsold for an extended period of time.

Brokerage companies offer valuation services with fees ranging between $3,950 and $7,500 for businesses with $3-10 million in revenues. A business owner should engage only a national valuation firm with the experience of many valuations each year to secure the most current market trends, and the valuation should have a reputation that is being accepted by buyers.

Fair market value is key

As important as determining the fair market value is the consistent financial performance throughout the transfer process. Typically, businesses sell over a period of one year depending on general market conditions, the respective market segment, and viability of the business.

Thus, it is important for a business owner to recognize that any potential buyer will review not only the last three years of the business’ performance by way of income tax returns, but the buyer will also review the financial performance of the business subsequent to said period.

Value loss is a concern

Consequently, it is very important for an owner to continue focusing on the performance of the business and to manage the business at peak financial performance. All too often, business owners “lean back” once they have made a decision to sell their business and have hired a business broker, only to learn that a sale is not progressing as fast as anticipated. Subsequently, the financial performance of the business suffers and when a buyer is finally introduced, the value of the business has deteriorated (relative to the previous valuation).

Most significant in this context is a deterioration of the cash flow, EBITDA, gross margins or a decline in revenues per se. Some buyers also tend to look at changes in productivity ratios such as sales/employee or operating margin/employee.

The Business Broker’s unique role

This particular situation leaves all parties in a very difficult situation: the owner, insisting on the previously established value by the valuation firm confronted by a buyer insisting on a value based on the current performance of the business. The likely outcome will be that the owner will not sell the business.

Good business brokers will try to avert this situation by consistently discussing the business’ performance with the owner, by preparing all marketing materials and advising an owner on the best terms and conditions of a sale. Preferably, a business owner selects a national business brokerage firm that can draw nationwide buyers from many different regions.

3 aspects of selling a business

Selling a business is typically a three part process: the initial preparatory phase for collection of all relevant data, valuation of the business, preparation of a confidential prospectus and development of a marketing plan. During the second phase, the marketing plan is implemented, including financial pre-qualification of potential buyers, interviewing buyers and discussing specific concerns. In the third phase, an offer to purchase is prepared, terms negotiated, the Due Diligence phase initiated, and a final closing performed.

The most important advice, however, always remains the same: with the transparency of the internet today and a business valuation comparison only a click away, a business owner should never neglect running the business at peak performance during the sale period. Buyers will detect very fast if a business has been neglected and will substantially adjust the price offered, or simply shy away from a purchase.

Achim Neumann is president of
A.Neumann & Associates, LLC
Atlantic Highlands,
an affiliate of BBN, Dallas, Texas, with 450 offices nationwide.

Visit the firm at www.neumannassociates.com
or call 732-872-6777

The 2009 tax breaks President Barack Obama signed into law should have bolstered many small businesses. Instead two years later, there is still confusion, and according to many, underutilized opportunities. Most small businesses agree that the Recovery Act’s impact is difficult to quantify.

While a number of companies credit their survival during the turbulence of the past two years to the  Recovery and Reinvestment Act, many are skeptical. They contend that the law – over a thousand pages — is onerous and limited in many areas where they were hoping to see more.

Most small businesses believe that large, public companies benefitted the most from the stimulus package. 70% believe that the package made little difference for their business according to a survey conducted last year by Discover Financial Services.

“For many small business owners, this stimulus package, which cracked the lid on credit access, plus new tax breaks and contracting opportunities, is just too unmanageable.” said Achim Neumann, President of A. Neumann Associates. “Without the right resources, it’s tough to research and understand all the available options.”

According to the Recovery Accountability and Transparency Board, approximately 92% of the funds are available for use. Obama administrators say there has been a positive effect, and the SBA contends that tens of thousands of small companies benefit from loans, federal contracts and from tax breaks.

Many small business tax provisions have under the new laws, been extended and some revived multiple times. And, many new government contracts were issued through the end of September.

Between February 2009 and August 2010, the SBA approved $22 billion in small business stimulus loans. As part of the package, fees were eliminated on SBA loans, and the guarantee level rose from 75% to 90%.

According to Neumann, “SBA-backed loans afford many benefits for business owners, not the least of which includes hiring workers and financing capital improvements in order to expand.”

The stimulus has created a few tax breaks for business owners, such as a carry back provision that allows them to apply losses to taxes paid on profits up to five years ago, presenting a refund opportunity.

The law also increased a deduction for equipment expensing and extended a tax credit for hiring veterans and high school dropouts. However, a common small business complaint is that the tax breaks didn’t offer immediate relief. Many had to wait until they filed their returns in order to get many of the benefits.

Click for Selected Businesses Here

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About A Neumann & Associates
A Neumann & Associates, LLC is a professional business valuation and business brokerage firm in New Jersey that assists business owners and buyers in the business transfer process. As President and Founder, Achim Neumann brings more than 25 years of business and management experience from multiple industries. This trusted NJ business broker is the New Jersey representation of Business Brokers Network, a firm with 450 offices and more than 20 years of experience, and with access to thousands of qualified buyers and sellers throughout the U.S. For more information, please contact A Neumann & Associates at 732-872-6777.

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On Monday, the White House announced several  small-business initiatives, including an extension of the permanent capital-gains tax relief for small company investors. The White House will also announce the creation of a new, private organization called Startup America, aimed at getting private companies to expand their support of entrepreneurship programs.

Small business owners have long proposed permanent tax breaks encouraging professional investors to fund promising start-ups. President Barack Obama is expected to introduce a 100% capital-gains tax break in his 2012 budget, and would extend a temporary measure originally introduced in September’s Small Business Jobs Act.

The White House tax proposal needing congressional approval eliminates capital gains taxes on investments held by certain small businesses for more than five years. This provision was part of a small business jobs act signed by Mr. Obama in September. The provision expires at the end of this year and the White House will ask Congress to make it permanent.

“Permanent tax reductions are certainly encouraging for first time investors”, said Achim Neumann, President of Neumann Associates, a New Jersey Business Brokerage firm. “Many of our first time buyers are searching for alternate ways to reduce the risk for their investments and minimize the risk/reward ratio.”

However, until the fine print of Mr. Obama’s proposal is made clear, many investors will not endorse the policy yet. Ultimately, the policy must be approved by Congress before becoming law. One concern is that a permanent capital-gains tax break doesn’t go far enough to trigger enough investments to jumpstart the economy. Thus, the SBA plans to host a series of roundtable discussions with entrepreneurs to find out which government burdens are most stifling to growing firms.

“Since SBA financing is a major source of funding for business purchases, an intensive dialog between the SBA and individual business owners can only help,” said Neumann.

Press Release

Atlantic Highlands, NJ, December 9, 2010 – A Neumann & Associates, a well-known New Jersey business brokerage company, has announced a slight uptick in the number of existing business transfer deals this year, and a dramatic shift in the type of funding used to finance these deals.

The number of businesses bought and sold has remained mostly stable during 2010.  Approximately 1,117 U.S. small businesses were sold during the third quarter according to BizBuySell.com. The difference is that the seemingly easy access to funding from friends and family has slowed.

“The majority of entrepreneurs, particularly first timers, tend to reach out to ‘friendly money’ after realizing they don’t have enough equity to purchase a business or after tapping out their savings and credit cards,” according to Achim Neumann, President of A Neumann & Associates, New Jersey. “In the past we’ve seen the lion’s share of funding come from friends and family; this is no longer the case.”

Many small business transactions are funded through conventional small business loans or angel investors. However, it seems that as banks have tightened up loan requirements in lock step with the grey economy, so relatives are following suit. This traditionally ready-made source of interest-free loans is getting harder and harder to come by, while simultaneously demanding more accountability.

As part of a survey conducted at Pepperdine University this fall, 35% of 388 U.S. entrepreneurs polled said they have funding from informal investors – down from 56% of entrepreneurs polled in the spring.

With the economy in the news daily, and business closures part of day-to-day conversation, the higher risks of starting a business are now glaringly obvious as compared to buying an ongoing business. As ‘friendly money’ becomes less accessible, entrepreneurs are seeking creative financing options. And relatives are viewing these loans as they would any other investment, looking for real return on their money.

This conservative trend seems to have hit every sector, particularly entrepreneurs starting businesses from scratch. According to Neumann, “With an existing ongoing business, entrepreneurs take on less risk with a proven model, and they get better financing, an established cash flow and a higher probability to succeed.”

Click for Selected Businesses Here

About A Neumann & Associates

A Neumann & Associates, LLC is a professional business valuation and business brokerage firm in New Jersey that assists business owners and buyers in the business transfer process. As President and Founder, Achim Neumann brings more than 25 years of business and management experience from multiple industries. This trusted NJ business broker is the New Jersey representation of Business Brokers Network, a firm with 450 offices and more than 20 years of experience, and with access to thousands of qualified buyers and sellers throughout the U.S. For more information, please contact A Neumann & Associates at 732-872-6777.

About A Neumann & Associates

A Neumann & Associates, LLC is a professional business valuation and business broker New Jersey firm that assists business owners and buyers in the business transfer process. As President and Founder, Mr. Achim Neumann brings more than 25 years of business and management experience from multiple industries. This trusted NJ business broker is the New Jersey representation of Business Brokers Network, a firm with 450 offices and more than 20 years of experience, and with access to thousands of qualified buyers and sellers throughout Canada and the U.S.

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PRESS RELEASE

Atlantic Highlands, NJ, October 12, 2010– A Neumann & Associates,  respected business brokers and business valuation firm in New Jersey, announced they will assist New Jersey business owners and buyers expedite the business transfer process in order to take advantage of a limited-time tax break.

Last month the Small Business Jobs Act was signed into law in large part to help entrepreneurs with tax cuts and loan availability. The bill provides more than $12 billion in tax breaks, and is of significant interest to New Jersey business buyers and sellers in that it eliminates all capital gains taxes on small business investments held more than five years.

That’s good news—possibly great new—for entrepreneurs interested in purchasing a business, as well as for business owners, considering putting their businesses up for sale either through a NJ business broker or going the business for sale by owner route. However, there is only a three-month window on this opportunity and the clock is ticking.

The business transfer process must take place prior to January 1, 2011. After this date the tax break drops back to 50%.

“This capital gains tax break is significant for many reasons, not the least of which is that for the first time investments in accounting, architecture and law firms, plus hotels, restaurants and some other kinds of businesses are now eligible,” according to Achim Neumann, President of A Neumann & Associates, NJ business brokers. “Previously these types of businesses simply weren’t eligible.”

This 100% capital-gains tax break is an extension of relief for investors that has been in place since last year’s stimulus. The Recovery Act allowed investors to exclude 75% of their profits if they invested in eligible small businesses between mid-February 2009 and the end of this year.

“This tax break is a terrific incentive, however the economics still need to add up, and sound business valuation techniques applied,” said Neumann. “We’re seeing a real shift back to basics among our clients when it comes to understanding how to price a business, and business sellers are faring much better than they had anticipated in this economic climate.”

According to the White House, an estimated 4.5 million small businesses and individuals will be able to make new business investments under this provision and earn a larger break on their taxes for this year.

For many considering taking advantage of the break, the questions of how to price a business and what business valuation methods to use are driving concerns. With over 25 years assisting buyers and sellers with the business transfer process,  A Neumann & Associates knows how to translate discounted cash flow valuation techniques into real world logic. They have built a reputation as the premier NJ business broker and can provide New Jersey business owners and sellers with a brief evaluation to see if they qualify for this substantial tax break. For more information, please contact A Neumann & Associates at 732-872-6777.

Click for Selected Businesses Here

About A Neumann & Associates

A Neumann & Associates, LLC is a professional business valuation and business broker New Jersey firm that assists business owners and buyers in the business transfer process. As President and Founder, Mr. Achim Neumann brings more than 25 years of business and management experience from multiple industries. This trusted NJ business broker is the New Jersey representation of Business Brokers Network, a firm with 450 offices and more than 20 years of experience, and with access to thousands of qualified buyers and sellers throughout Canada and the U.S.

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The one question sellers consistently raise is how long will it take to close a deal once a business valuation has been completed and there is an agreed upon offer in place?

As the leading business broker in NJ, we typically rephrase the question; will there be “buyer’s remorse” and is the business buyer truly entrepreneurial enough to absorb the challenges and risks in a business – with the first ones typically facing her/him during the due diligence process.

More often than not, entrepreneurial skills are presumed to be ingrained with such business owner attitudes like ‘focused, visionary, and risk assuming’ – to mention a few. But such traits also apply to Fortune 500 executives or successful professionals. So where is the difference?

In general, buying a small or mid-sized business for sale will result in acquiring limited resources, specifically, as it relates to capital and human resources or talent. It’s the task of the entrepreneur to expand these resources by attracting suitable and skilled talent to gain a competitive advantage in his field. By gaining such an advantage, the business owner will ultimately in a position to succeed and consistently grow the business.

But can only the “born entrepreneur” succeed in this venture? Absolutely not, as long-time NJ business brokers we’ve learned that excellent analytical skills, good ‘people skills’, and a good, solid understanding of the business’ service and products– will easily out-weight other factors.

This then leads us back to the question, how long of does it take to conduct a proper business valuation and close a deal, and will there be buyer’s remorse? As a rule of thumb, if the buyer had successfully operated a business in the past, she/he is much more likely to overcome hurdles in the due diligence process by looking at the “big picture”.

However, if the buyer recently left a large corporate environment – with all the benefits and securities of a large corporation – or if the buyer was not successful in his previous venture(s)– then the likelihood that challenges in the due diligence process will trip her/him up are significantly larger.

By Achim Neumann

President

A Neumann & Associates, LLC

Click for Selected Businesses Here

Edited by Repaz Marketing

In New Jersey mergers and acquisitions are on the upswing in 2010 and more deals are being completed as the economy shows stability.

I was quoted in a recent NJ Biz article that discusses this trend. Below is an excerpt from the write-up. The complete article can be read here.

Excerpt from NJ Biz article…

“Garden State firms were involved in 290 transactions, worth a total of about $13.8 billion, during the first half of 2010, according to data from FactSet Research Systems Inc. and Thomson Reuters.

During the same period in 2009, there were 248 New Jersey deals valued at about $114.3 billion — but that total drops to just $5.3 billion after backing out two outsized deals worth a total of $109 billion: Merck & Co Inc.’s $41.1 billion acquisition of Schering Plough Corp. and Pfizer Inc.’s $68 billion acquisition of Wyeth.

Nationally, U.S. companies completed 1,434 M&As, worth a total of $324.4 billion, in the first half of  2010; for that same period last year,1,224 deals, worth $392.1 billion, were completed, according to The Mergermarket Group. Some companies did not disclose the value of their M&As.

One M&A adviser said more companies seem to be backing away from using high debt levels to fund an acquisition. “I’m seeing some firms using up to 40 percent of their cash to finance a deal,” said Achim”

Written by Achim Neumann, NJ

President

A Neumann & Associates, LLC